The opinion of the court was delivered by: KIRKPATRICK
This action at law, brought by a corporation taxpayer to recover additional income and excess profits taxes paid under protest, was tried to the Court, jury trial having been duly waived.
A written stipulation covering all the facts necessary to the determination of the case was filed and is adopted as the Court's special findings of fact. A summary may be useful.
The taxes involved are for the year 1919. In its return for that year the plaintiff computed an income tax of $1283.07 and an excess profits tax of $487.87.
On August 29, 1921, the plaintiff received the report of an internal revenue field agent indicating additions to both income and excess profits amounting together to $13,277.84. The basis for this report was the total disallowance of the value which the plaintiff had put upon a patent which it owned and under which it carried on a large part of its business. This resulted in increasing the income tax by disallowing annual depreciation of some $26,000, and in increasing excess profits by reducing the invested capital by $455,000.
On September 13, 1921, the plaintiff wrote a letter to the Commissioner of Internal Revenue referring to the agent's report and saying: "Before putting the charge through, this Company is anxious to appear before you praying relief. If you will please inform us when we may appear before your Board for the purpose of showing that we are entitled to relief, you will greatly oblige. * * *"
The next step was the Commissioner's letter of September 19, 1921, to the plaintiff notifying it that the Department claimed and would proceed to collect an additional tax of $12,846.57. Apparently the Commissioner had decided to allow some small value for the patent, though, of course, nothing like what the plaintiff desired.
On October 21, 1921, the plaintiff sent a letter, accompanied by a brief, to the Commissioner, stating that it was presenting its reasons why the assessment of additional tax for 1919 was unjust, etc., and concluding, "wherefore the said Company prays for relief from such assessment, under the law and regulations governing these matters." The brief was entirely devoted to an argument intended to show that the patent was worth the $455,000 originally returned as its value.
The next thing that occurred was that on August 3, 1922, the Commissioner wrote the plaintiff a letter, and a statement which began, "your application for assessment of your profits tax for the year 1919, under the provisions of Section 328 of the Revenue Act of 1918 [40 Stat. 1093], has been allowed * * *," resulting in a profits tax of $8,002.12. There was also an additional income tax disclosed of $3,214.72, making a total additional tax, income and excess profits, over the tax-payer's original computation, of $9,446. Although thus advised that the Commissioner had made a special assessment the plaintiff did not protest or raise any question about the procedure in computing the excess profits tax under Sec. 328, but filed another letter about two months later protesting only the amount of the new assessment, and sent with it another brief entirely devoted to additional arguments to show why the value claimed for the patent should be allowed.
Then, on February 3, 1923, the plaintiff wrote a letter to the Commissioner, which it requested be considered as "formal application to your Department for relief" under Secs. 327 and 328, 40 Stat. 1093. It contains the following reservation or condition:
Both before and after this letter there must have been conferences between the taxpayer and the Department. This appears, not from the stipulation, but from the plaintiff's statement of claim. What position the plaintiff took at those conferences or hearings does not appear.
Later, in 1923, the plaintiff received notice and demand for the additional tax and paid it under protest. Thereafter and in due time the plaintiff filed its claim for refund, assigning ten reasons. The first three reasons complain generally of the refusal to give the patent the value which the plaintiff claimed for it. The fourth reason was, "because the Bureau of Internal Revenue determined the said additional tax of $9446.00 under the provisions of Sections 327 and 328 of the Revenue Act of 1918." The next five remaining reasons all complain that the Commissioner in proceeding under Secs. 327 and 328 failed ...